RBS warns of risks after UK takes control of bonuses

LONDON – Bailed-out Royal Bank of Scotland Group Plc warned it faces heightened risks and will struggle to hire and retain key staff after the UK government demanded control of bonuses as a condition for insuring its bad debts.

RBS, set to become 84 per cent state-owned after the latest aid package, detailed the unprecedented direct intervention in a circular published yesterday ahead of a shareholder meeting later this month to vote on its accession to the state-backed Asset Protection Scheme (APS) for toxic loans.RBS said it had been forced to agree to restrictive terms in order to join the scheme, including a clause that hands the Treasury (through UK Financial Investments (UKFI) which manages government holdings in rescued banks) ‘the right to consent to the quantum and shape of the 2009 bonus pool’.The government is facing public anger over the return of ‘fat cat’ bonuses and hefty pay packages at rescued banks such as RBS, whose problems put it at the centre of the crisis.But the spectre of an effective state veto over pay will place the bank at an even further disadvantage as it rebuilds its battered Global Banking and Markets investment banking arm, prompting concern from institutional shareholders and a stark warning to investors from RBS itself.’Depending on UKFI’s approach to recommendations made by the board in respect of that bonus pool, this requirement may adversely impact RBS’s ability to attract and retain senior managers and other key employees and thereby place RBS at a significant competitive disadvantage against its competitors,’ the bank said in the circular.The move could also increase the risks facing RBS and weaken management’s ability to deal with them, it said.RBS already faced negotiations with the government over 2008 bonuses after it was rescued from near collapse, but news of an explicit veto demand for this year’s compensation added to pressure on RBS shares in a weak market yesterday.The stock was down 6,3 per cent at 32,1p, not far from last week’s seven-month low of 29,62p.’It is a gross understatement to say that the interference by the Treasury will pose a challenge for management,’ said Ronnie Fox of law firm Fox, a specialist in employment law.’If total compensation (including bonuses) paid to profit-generating executives at RBS is significantly lower than competitive organisations are paying their senior staff, RBS will simply lose its best people.’INVESTORS FRETThe precondition, which emerged yesterday, worried institutional investors. Led by the Association of British Insurers, they cautioned short-term pressures on the bank’s largest shareholder should not damage long-term gain.’Mindful of their fiduciary obligations to their beneficiaries, shareholders will look for an approach which protects the long-term value of their investments,’ said Peter Montagnon, director of investment affairs at the ABI.’This means the bank must not overpay, but it must also be able to pay commercial rates.’- Nampa-Reuters

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